IIP points to growth moderation

Growth in the Index of Industrial Production (IIP) for June, at 7.1%, was below consensus estimates, though everyone expected growth would be single-digit. Much of the slowdown is being ascribed to the base effect and the expectation is that growth would remain single-digits in the rest of the current fiscal as the base effect wanes. Economists have been quick to say that growth continues to be robust, shown by the seasonally adjusted month-on-month growth in IIP in June of around 1%, compared with negative growth in May. The slowdown has been most pronounced in capital goods, but capital expenditure is, by nature, lumpy, and a slowdown in a particular month cannot be taken to be indicative of a trend. Also, Citigroup economists Rohini Malkani and Anushka Shah point out that on a month-on- month basis, capital goods were up 6.3%, while basic goods posted a contraction of 2.4%.

Graphic by Yogesh Kumar/Mint

Other indicators have also been pointing to a moderation in growth. The HSBC Purchasing Managers’ Index surveys, for instance, which track month-on-month growth, have come off their peaks. So has the Organisation for Economic Cooperation and Development (OECD) leading indicator for India. Siddhartha Sanyal, chief economist at Edelweiss Securities Ltd, also points to the steady deceleration in the intermediate goods index which, he says, is a leading indicator for IIP. He says that’s because the period of restocking as a consequence of the recovery is over and new orders to firms manufacturing intermediate goods are now back to normal levels. As the chart shows, growth in the intermediate goods index peaked last December.

There is, however, something very wrong with consumer non-durables, which have grown a meagre 1.3% year-on-year in June, on top of a very small 0.7% rise in June last year. While home and personal care companies have seen good volume growth in the June quarter, analysts say that smaller firms manufacturing for the lower end of the market have been affected.

Moreover, while rural purchasing power has been supported by social security schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme, these schemes do not exist for the urban poor. With food inflation continuing in double digits despite the base effect wearing off, the lack of growth in consumer non-durables is likely to continue for some time, especially if rainfall distribution this monsoon remains skewed as it is at present.